As I celebrate my first full year at R J O'Brien this weekend's diary is a little short on substance and length as markets have for me moved into a much more complicated phase.
For a significant part of this year the "3 Analogs" of 1990,2000 and 2007 have been my guide in trying to figure out markets and the underlying backdrop.
In particular the 2007 analog on Bonds (2-year yield in particular). Employment, the Fed path and even equities have served us well.
Even as we stand here today it remains very "on point"
Of course, in the week ahead the most important data point is going to be the Employment figures on Friday but even they will likely not be conclusive about signaling 25 or 50 at the next meeting.
Why?
Well of course we have 2 employment prints ahead of the next Fed meeting on 07 Nov with the October numbers being released on 01 November.
Yes, that is the "Blackout period", but that is not a problem. We have "Vice Fed chair' Timiraos to deal with that.
So, to a certain extent it is worth refreshing what these numbers brought us in 2007 on 3rd October.
NFP was expected to be 100k and actually came in marginally higher at 110k, and the prior month (July) was revised higher (first revision) by 93 k from minus 4k to 89k. That is totally coincidentally where July has printed this year initially
So far this year 6 of the 7 initial numbers have been revised lower. The only revision up was in March and that was just 7k.
The 4 revisions lower since then have been minus 67k; minus 56k; minus 92kand minus 25k for an average of minus 60k.
The unemployment rate rose by 1/10th in Sept 2007, back to 4.7% having dipped lower by 1/10th the prior month. At 4.7%, however it was just 3/10ths above the trend low at that point. So, a similar development this time would be to see a relatively in line NFP, a revision lower of last month's number and a pop back to 4.3% unemployment.
How did the Fed react back then when NFP was a little better but unemployment rose again?
They cut rates on October 31st by 25 bp's- They did not have the October employment data to focus on which they will this time. That came 2 days later. So, all this would suggest that a similar outcome would push market expectations towards 25 bp's on November 11th but put us in a similar situation as the last meeting where that could change in the final week.
So, what happened with the Employment data on 02 Nov 2007?
Expectations had been lowered to 85k but the number beat at +166k with the prior number being revised down by 14k and unemployment steady at 4.7%.
IF the data comes out in similar fashion this time, then there is little chance of a 50 bp's move on 7th November or for that matter on 18th December as back in 2007 we again saw unemployment steady at 4.7% in November.
So, for now, the base case has to be that we head for a 25 bp cut in both November and December and worse than expected employment numbers will be needed to raise either of those meetings to 50 bp's
So right now, in the absence of that deterioration or a new "risk event" the risk reward of playing for more than this seems poor right now.
Back then, the big change in the picture (from an employment perspective) did not come until 04 January 2008 and the December unemployment report.
NFP was expected to be a low 70k and printed an even lower 18k. But most importantly the unemployment rate moved from 4.7% to 5% on an unchanged participation rate.
On 22 Jan 2008 the Fed cut 75 bp's. The meeting this time is even later on 29th January.
BUT...unlike my comment of recent months that - "Unemployment is not the only thing, it is everything" there are a lot of moving parts in this backdrop that cannot be ignored at this point
I feel like the picture is getting increasingly more complicated by the day.
From the financial/political volatility in Japan, the "shock and awe" financial measures in China as well as the "Taiwan" issue , the dual conflicts in Ukraine and the middle east, the policy shift by the Fed and of course the "Polarisation" of US politics and out of control fiscal spending/debt growth- the last word that enters my mind right now is "stability" and the first word is complacency.
This compendium of moving parts creates a myriad of negative possibilities for economies and financial markets amid a rhetoric of "It's all going to be ok". That is possible but each time we think one of these factors has run its course it suddenly resurfaces with even more gusto than the last time.
This is the environment in which mistakes get made, normally with unintended consequences.
The 2007 analog would simply say that things are going to get worse before better with many of the yield charts in particular giving that warning (2-year yield/ 2-year yield to Fed Funds, 2's 5's curve, SOFRZ5 etc. etc.)
The important thing is that when charts like this suggest caution it does not have to be the same catalyst as historically.
All those charts in 2007 suggested was that there were difficult times ahead. It does not have to be sub-prime. It does not have to be housing. It does not have to be banks- albeit it is not impossible that some of these elements are part of the building blocks.
The reality is that there are enough stresses and imbalances out there that could become the "cause and effect" for increased market turmoil going into 2025.
Maybe all this blows over rather than blows up and we all go back to "Happy days Are Here Again".
However, we sometimes forget that the economic stress often starts elsewhere and then feeds back into the economy and what one day seems fine is very suddenly not so much.
So, for now, I will continue to stick with that 2007 analog (and to a lesser extent 1990 and 2000) all of which suggest that it is not going to be just fine.
Nothing is ever the same in terms either cause and effect or outcome,
As long as the path remains more similar than different in markets, I will try and figure where the catalysts will be and IF that path changes will also try and figure out what the new path is.
Right now, I am honestly short on any dramatic new insights but often that can change quite rapidly.
But for now, I think the one path not to follow, is the path of complacency, because that is nearly always when things go from bad to worse.
